Wells Fargo 2010 Annual Report Download - page 101

Our venture capital business can also be volatile from
quarter to quarter. Certain of our venture capital businesses
are carried under the cost or equity method, and others (e.g.,
principal investments) are carried at fair value with unrealized
gains and losses reflected in earnings. Our venture capital
investments tend to be in technology and other volatile
industries so the value of our public and private equity portfolios
may fluctuate widely. Earnings from our venture capital
investments may be volatile and hard to predict and may have a
significant effect on our earnings from period to period. When,
and if, we recognize gains may depend on a number of factors,
including general economic conditions, the prospects of the
companies in which we invest, when these companies go public,
the size of our position relative to the public float, and whether
we are subject to any resale restrictions.
Our venture capital investments could result in significant
losses, either OTTI losses for those investments carried under
the cost or equity method or mark-to-market losses for principal
investments. Our assessment for OTTI is based on a number of
factors, including the then current market value of each
investment compared with its carrying value. If we determine
there is OTTI for an investment, we write-down the carrying
value of the investment, resulting in a charge to earnings. The
amount of this charge could be significant. Further, our principal
investing portfolio could incur significant mark-to-market losses
especially if these investments have been written up because of
higher market prices.
For more information, refer to the “Risk Management –
Asset/Liability Management – Market Risk – Equity Markets”
section in this Report.
We rely on dividends from our subsidiaries for
revenue, and federal and state law can limit those
dividends. Wells Fargo & Company, the parent holding
company, is a separate and distinct legal entity from its
subsidiaries. It receives a significant portion of its revenue from
dividends from its subsidiaries. We generally use these
dividends, among other things, to pay dividends on our common
and preferred stock and interest and principal on our debt.
Federal and state laws limit the amount of dividends that our
bank and some of our nonbank subsidiaries may pay to us. Also,
our right to participate in a distribution of assets upon a
subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors.
For more information, refer to the “Regulation and
Supervision – Dividend Restrictions” and “–Holding Company
Structure” sections in our 2010 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 25 (Regulatory and
Agency Capital Requirements) to Financial Statements in this
Report.
Changes in accounting policies or accounting
standards, and changes in how accounting standards
are interpreted or applied, could materially affect how
we report our financial results and condition. Our
accounting policies are fundamental to determining and
understanding our financial results and condition. Some of these
policies require use of estimates and assumptions that may affect
the value of our assets or liabilities and financial results. Several
of our accounting policies are critical because they require
management to make difficult, subjective and complex
judgments about matters that are inherently uncertain and
because it is likely that materially different amounts would be
reported under different conditions or using different
assumptions. For a description of these policies, refer to the
“Critical Accounting Policies” section in this Report.
From time to time the FASB and the SEC change the financial
accounting and reporting standards that govern the preparation
of our external financial statements. In addition, accounting
standard setters and those who interpret the accounting
standards (such as the FASB, SEC, banking regulators and our
outside auditors) may change or even reverse their previous
interpretations or positions on how these standards should be
applied. Changes in financial accounting and reporting standards
and changes in current interpretations may be beyond our
control, can be hard to predict and could materially affect how
we report our financial results and condition. We may be
required to apply a new or revised standard retroactively or apply
an existing standard differently, also retroactively, in each case
resulting in our potentially restating prior period financial
statements in material amounts.
Our financial statements are based in part on
assumptions and estimates which, if wrong, could cause
unexpected losses in the future. Pursuant to U.S. GAAP, we
are required to use certain assumptions and estimates in
preparing our financial statements, including in determining
credit loss reserves, reserves related to litigation and the fair
value of certain assets and liabilities, among other items. If
assumptions or estimates underlying our financial statements
are incorrect, we may experience material losses.
Certain of our financial instruments, including trading assets
and liabilities, available-for-sale securities, certain loans, MSRs,
private equity investments, structured notes and certain
repurchase and resale agreements, among other items, require a
determination of their fair value in order to prepare our financial
statements. Where quoted market prices are not available, we
may make fair value determinations based on internally
developed models or other means which ultimately rely to some
degree on management judgment. Some of these and other
assets and liabilities may have no direct observable price levels,
making their valuation particularly subjective, being based on
significant estimation and judgment. In addition, sudden
illiquidity in markets or declines in prices of certain loans and
securities may make it more difficult to value certain balance
sheet items, which may lead to the possibility that such
valuations will be subject to further change or adjustment and
could lead to declines in our earnings.
Acquisitions could reduce our stock price upon
announcement and reduce our earnings if we overpay
or have difficulty integrating them. We regularly explore
opportunities to acquire companies in the financial services
industry. We cannot predict the frequency, size or timing of our
acquisitions, and we typically do not comment publicly on a
possible acquisition until we have signed a definitive agreement.
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